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Leasing a commercial property

Why you really need a solicitor when leasing commercial premises

Anyone thinking of taking on commercial premises of any type should get professional advice from a solicitor.

Leases of business premises are very different proposition to residential leases and can be
much more onerous for tenants. Getting proper legal advice about the contents of the lease can save a lot of trouble and money.

Large commercial organisations invariably instruct solicitors. But many people starting up a small business assume that having a solicitor is an unneccessary luxury when leasing premises. This often turns out to be a short-sighted decision.

It is important to understand the nature of a lease. A business lease is a legally binding contract between the building owner (Landlord) and the occupier (Tenant). Failure by Tenants to comply with the terms of the agreement can result in expensive claims by the landlord and even court action.

Once you have taken a lease (or an existing lease has been transferred to you) you will become liable to comply with all the numerous covenants and restrictions contained in it. This is a commercial document so you cannot argue that you did not understand it.

Having a solicitor guide you through the lease and advise you on the implication of the various clauses can save you money in the long run.

Commercial leases are written by solicitors acting for landlords, and are therefore biased in favour of their clients. Supermarkets and other major companies may be able to negotiate more favourable lease-terms when renting property but do not expect this for the average business.

Agreeing the Heads of Terms – check they comply with the RICS code

Tenants should beware of relying on verbal statements made by a landlord’s agents during negotiations. When the main terms of a lease have been agreed they should be recorded in writing, known as the Heads of Terms.

The Royal Institution of Chartered Surveyors (RICS) encorages landlords and agents to adopt its Code for Leasing Business Premises in England and Wales. This code is the result of collaboration between commercial property professionals and industry bodies representing both owners (Landlords) and occupiers (Tenants).

The lease code sets out a list of items to be used as a checklist for negotiations before the grant of a lease and lease renewals. Landlords should be transparent about any departures from the code in a particular case and the reasons for them.

The code provides model Heads of Terms which should record the terms agreed between the parties prior to the lease being signed. Any such Heads of Terms should make it clear that they are code-compliant.

But the use of this code is by no means compulsory or universal so it cannot be assumed that terms will be code-compliant.

Here are some of the important points found in commercial leases on which a solicitor can give advice:

Does the lease correctly incorporate the agreed Heads of Terms?

Landlords’ solicitors may produce their standard form lease without reference to the terms agreed with the landlord’s agents. So it is important to check that the draft lease produced by the landlord’s solicitors does correctly incorporate all the agreed terms.

Rent deposits and guarantees

It has become common practice for landlords to require new tenants to put up a rent deposit or provide a guarantor for the rent, especially when a tenant is just starting up in business and has no proven track-record.

Proper arrangements must be made for the holding of the deposit and how it is to be used. Provision must also be made as to what is to happen if the landlord sells the freehold.

There is an industry-standard deed which is widely used, but again its use is not compulsory and the landlord’s solicitors may produce their own version.

If a guarantor is required this person should receive separate legal advice as to the extent of their obligations.

Rent review clause

Leases now often contain a rent review clause. The purpose of such a clause is to adjust the initial rent at specified intervals – say every five or even three years.

Review clauses are usually ‘upwards-only’ – i.e. if the market rent at the time of the review would actually be lower than the original rent, then the reviewed rent will stay the same as the original rent. But of course if open-market rents have risen then the rent will rise accordingly.

The rent review clause sets out when each review will take place, the method of review, assumptions and disregards to be made when valuing the premises for the purpose of rent review, the procedure to be followed, and provisions for dealing with disputes if they arise.

Rent review clauses can contain many traps for the unwary which may not be discovered until the first review (or until the tenant receives a letter baldly telling him or her of a massive increase in the rent!)

So it is important for tenants to get proper advice from a solicitor about the effect of any such clause before signing a lease.

Break clauses

Modern leases often contain provisions enabling the tenant (and perhaps the landlord) to terminate the lease and walk away from the premises. Such a clause is particularly useful to tenants in conjunction with a rent review clause.

A rent review may determine that the current open-market rent is higher than the previous rent even if the tenant’s own trading income is falling. The tenant to be able to terminate the lease if this happens and have a break clause which can be operated after a rent review.

Landlords will normally insist upon the terms of any break clause being followed to the letter. For example they will probably require the rent to be paid up to date – and if the break clause is to operate on a rent payment day that could mean having to pay a quarter’s rent in advance at the same time.

So the wording of any break clause must be carefully considered.

User clause

Commercial leases will always contain a clause restricting the use of the premises. Such a clause may permit a wide variety of uses, e.g. as a shop without any restriction on the type of goods which can be sold.

But they can also be very narrowly drawn and only permit the tenant to carry on a specific trade, e.g. a ladies hairdressing salon, and nothing else.

The user clause should of course enable a tenant to carry out the type of trade which they are originally planning. But tenant may encounter problems if they want to sell a wider variety of goods than originally planned or if they want to change the use altogether.

Repairs and Alterations

Unless the whole of a building is being leased the tenant will normally only be responsible for internal decoration and repair of premises. But even then tenants must be careful what they agree to in the lease.

For example a covenant to ‘put and keep’ the premises in good repair and decoration means that a tenant will have carry out repairs and decorate the premises right at the start of the lease to put them into good condition, and not just take them in their existing state.

The exact wording of the repairing covenant may be of major significance when the tenant vacates the property. Landlords generally want tenants to leave property in good condition and will probably serve what is known as a ‘schedule of dilapidations’ listing all works which they consider any breaches of the repairing covenant, together with their estimate of the cost involved, which can be substantial.

Tenants will also require their landlord’s consent to make any alterations to a commercial property. If a tenant wants to make alterations in order to make the property suitable for the proposed use these will need to be agreed as part of the original lease terms.

Landlords may agree to alterations but also require the premises to be reinstated at the end of the lease, which would mean additional cost to the tenant.

Other covenants and things to be considered

The above are just some of the more important contents of a modern lease. The complete
document is likely to run to many pages and will contain numerous covenants and provisions all of which the tenant is required to comply with.

Tenants should therefore ask their solicitor to go throught the lease to check that there are no onerous or unusual provisions and to advise them.

If a lease is to run for more than 7 years then it must now be registered at the Land Registry whether or not the landlord’s title is registered. Stamp duty may also be payable. Those are matters which a solicitor can advise on.

Short-term leases are commonly expected to be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. The Act gives commercial tenants certain rights to renew a lease when it expires, but the landlord may insist on these rights being excluded.

In that case the tenant may find that they will be forced to vacate the premises at the end of the lease if the landlord is not willing to agree a fresh lease. Having to move at the end of a lease could affect a tenant’s trade, so giving up the right to renew should be carefully considered.

Anyone taking on a commercial lease, however long the term, should therefore obtain legal advice from a solicitor.


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